Investing

[Note: This post has been updated as of Jan. 27, 2015 to note a couple of recent changes at discount brokers and to reflect the drop in interest rates subsequent to the Bank of Canada rate cut on Jan. 21, 2015. Feel free to have it bookmarked.]

You can park cash in a High Interest Savings Account (HISA) in a discount brokerage account by buying it just like you would purchase a mutual fund. These HISAs typically pay much higher interest rate than money market funds and are ideal for the cash balance in your Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA) and investment accounts. Like online savings accounts like Tangerine, Investment HISAs are eligible for Canada Deposit Insurance Corporation (CDIC) insurance.

First a note of caution: first check with your broker that no fees of any kind are charged for buying or selling HISAs and no fees are applied for early redemptions. For example: Scotia iTrade charges an early redemption fee of 1 percent (minimum of $38.88) on all mutual funds other than Scotia and Dynamic Funds held for less than 90 days. A Scotia iTrade client parking $10,000 for 30 days in a TD HISA will earn $10 in interest but pay an early redemption fee of $100. If the client had instead parked her cash in the Bank of Nova Scotia HISA, there would have been no early redemption penalty.

The savings accounts offered through discount brokers have one huge advantage over high interest savings accounts offered by online banks. The cash parked in HISAs are counted towards the cash balance available in an account. Therefore, these funds are readily available for your trades and your broker may even automatically sell all or some of your HISA to fund your trade. In contrast, parking cash in an online savings account is not practical for registered accounts like RRSPs, RRIFs and TFSAs and it may take 3-4 business days to transfer money from (or to) an online bank to (or from) taxable brokerage accounts. These savings accounts are also a much better alternative to traditional money market accounts because they pay a much higher interest rate. For example, as of this writing, the TD Canadian Money Market Fund sports an yield of 0.41 percent which is much less than the typical 1.0 percent paid by discount broker HISAs.

TD Direct Investing: TDB8150, TDB8155, TDB8159 and TDB8152 (USD) have no fees. Other HISAs not available since 2012. TDB8157 is also not available.
RBC Direct Investing: RBF2010, RBF2020, RBF2030, RBF2040 and RBF2014 (USD) have no fees. Other HISAs not available.
Scotia iTrade: Only DYN500, DYN1300, DYN400 and DYN1350 are no-fee. Other funds are available but iTrade charges a fee of 1% (minimum of $38.88) for non-Scotia funds redeemed within 90 days.
CIBC Investor’s Edge: No fee on ATL5000. BTB100 is not available.
BMO InvestorLine: No fee on AAT770 and AAT780 (USD). Other savings accounts are not available for purchase as of Oct. 2013. Initial minimum of $5,000 and additional minimum of $500. Can be redeemed anytime without penalty. See this post for more information.
Credential Direct: No fee on NBC100.
Disnat: No fee on NBC100.
National Bank Direct: No fee on NBC100.
QTrade: No fee on ATL5000.

Interest Rate History

Tips for getting the most out of HISAs

You can park cash in these accounts by pulling up a quote for the fund code and clicking on the “Buy” button.

Most of these funds have an initial minimum investment of $1,000. Note though that the initial minimum investment may be quite different at your broker. TD HISAs have a minimum investment of $100 at TD Direct Investing even though the website says that the minimum is $1,000. Interest is accrued daily and paid monthly.

Typically, these accounts are sold without any loads or minimum holding periods or any fees of any kind but as noted earlier, always check first before buying.

If you have a large cash balance, make sure you split your savings in chunks of less than $100,000 between a number of these accounts. That way all your savings will be fully covered by Canada Deposit Insurance Corporation.

All these HISAs are also available as F-series funds that are only available through financial advisors. Even if you are able to pull up a quote and place an order for a F-Series fund (such as RBF2011) in a discount brokerage account it will be rejected later.

The multiple savings accounts from TD Bank and Royal Bank are equivalent. They are offered by subsidiaries and can be used to work around the $100,000 CDIC deposit insurance limit.

Most brokers offer at least their in-house HISAs but your mileage may vary. For instance, only RBF* funds are available to clients at RBC Direct Investing.

You’ll notice that the Investment Savings Accounts pay a typical trailer fee of 0.25% to the dealer. The interest rate published in the table above already takes into account the trailer fees paid to the dealer. For example, TDB8150 is currently listed as paying 1%, which is the interest you’ll earn on your deposits and is net of the trailer fee paid by TD ISA to the broker.

The Sleepy Mini Portfolio was launched in 2007 to demonstrate how a mechanical investment program can slowly but surely build wealth over the long term. All you need to implement such an investment program are (1) some initial effort in mapping out an asset allocation strategy (2) a calculator to divvy up your regular contributions and (3) discipline to stick to the strategy through all kinds of market conditions. I have personally implemented this portfolio for our kids’ RESPs and if you want a more sophisticated portfolio you may to check out the Sleepy ETF Portfolio that adds a few more asset classes.

The portfolio kicked off with an initial infusion of $1,000 with a target allocation of 20% bonds, 20% Canadian stocks, 30% US stocks and 30% International stocks. Another $1,000 was added to the portfolio every quarter since then for a total investment of $26,000 so far. Here’s how the portfolio looks as of March 25, 2014:

Transactions

Notice that due to strong recent returns from the US market, we are not adding new money this time around.

The following chart shows the performance of the Sleepy Mini Portfolio for the past year.

The portfolio has returned an annualized 10.45 percent since inception. A word of caution: don’t let the recent returns fool you. Long-term returns from this portfolio can be expected to be much more modest (in the low- to mid- single digits).

If you have just opened a trading account with a new discount broker or you have accounts in different places and want to consolidate, you’ll need to transfer your holdings between brokers. In this post, I have put together a detailed checklist on what you have to do to make this process as painless as possible.